In this blog, I will look at the benefits of Shareholder Protection. In my previous blog, I discussed the reasons why you may want to consider protecting your business in Business Protection – are you covered.
Shareholder protection
Shareholder protection and Partnership Protection protects the:
• Business owners
• Families
• Business itself
• Employees
Imagine your business partner or fellow director dies – it would no doubt be a really sad time however, without protection in place, the company and the surviving family could be faced with some difficult decisions.
At ABC Ltd Jo, Angela and Bob have a 33.3% shareholding each. Bob unfortunately dies suddenly. On his death, the shares are passed to his family. His income is gone and family own shares in a business they know nothing about. They would like to sell the shares but if they could find a buyer, at what price should they sell? Jo and Angela want to buy the shares but they can’t afford to. They don’t want Bob’s family to work in the business, but they don’t want them to sell the shares to a competitor. If the family retain the shares they would still have to pay dividends to Bob’s family.
XYZ Company were faced with a similar situation at the same time when Bob died however, each of the Shareholders had taken out a life or earlier critical illness policy which was then placed in trust for the benefit of the other Shareholders. The amount of cover was equal to the value of their shareholdings. On the death of the director at XYZ Ltd, the life-cover paid out the value of the director’s shares to the other shareholders and because they had set up a legally binding agreement (double/cross option agreement), the Shareholders had the option to buy the shares and family had the option to sell the shares – if either exercised the option, the other party had to comply. The Shareholders exercised their option and bought the shares from the family. The remaining shareholders retained the shares and the family received a fair price for them.
Is your company ABC Ltd or XYZ?
If its ABC Ltd, contact me to arrange a complimentary no obligation initial meeting.